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Tuesday, January 10, 2006

Ind. Gov't. - Still more on: Secrets of health care pact for legislators and staff may be revealed

Don't miss listening to this NPR story from this morning on accounting for health-care benefits. Titled "State, Local Governments Face New Accounting Standard", the summary reads:

State and local governments often have difficulties balancing their budgets, and this year it is going be even more difficult. A new accounting rule has been approved that may greatly complicate the way cities and states calculate employee retirement benefits.
Here are some brief notes I took from listening to story itself:
A new accounting rule could make it harder for state and local government to raise money in the bond market.

The new rule only applies to non-pension benefits, such as health care. When governments promise benefits they legally have to pay down the road it is just a form of deferred compensation and they should have to account for it when they agree to pay it. The rule change forces state and local governments to confront their huge unfunded liabilities. Most governments now have actuaries working to figure out what the cost is.

Although it will be politically difficult for many governments to address the problem, if they don't it will hurt their reputations with bond rating firms. Those who can't answer the question of how they are going to deal with this liability can see their bond ratings lowered, making it more expensive for them to borrow money. That means state and local governments that try to cover up the problem will pay a steeper and steeper price as time goes on.

What can be done? Here are some documents the ILB has located on this question.
"You Should Be Worried Sick about Health Insurance: Companies are cutting back on post-retirement coverage -- and they're not obligated to cover you at all" is the title to this June 1, 2000 article in Business Week.

"How safe are your retiree health benefits?" is a recent Wall Street Journal article reprinted in The State.com.

"Can the Retiree Health Benefits Provided By Your Employer Be Cut?" is the title to a comprehensive publication by the U.S. Department of Labor.

"Retiree Health Insurance: Erosion in Employer-Based Health Benefits for Early Retirees" is a 29-page GAO study from 1997.

More on the new accounting requirement. Here are quotes from a 1/6/06 column in the Boston Globe by Steve Bailey:
Financial documents are often best read starting with the footnotes in the back.

Take, for instance, the state comptroller's new Comprehensive Annual Financial Report for Massachusetts. On Page 116 there is a brief discussion of the bill the state faces for healthcare for retired state employees:

''The Commonwealth has not performed an actuarial valuation of its post-retirement health care and life insurance benefit liability. Private industry typically sees an actuarial accrued liability of 10 to 20 times the current annual payments. For the Commonwealth, this would extrapolate to an actuarial accrued liability of $2.5 billion to $5 billion."

That is a huge number for a state just emerging from a difficult financial stretch. But Massachusetts can take comfort in knowing it is hardly alone. State and local governments across the country are being forced to own up to the real cost of providing benefits -- largely healthcare -- to retirees. The pressure comes from a rule change by the Governmental Accounting Standards Board, or GASB, that will force governments to calculate and disclose these costs, just as private companies do.

Governments, which have been funding these costs on a pay-as-you-go basis, can't even quantify the costs of these benefits. * * *

The GASB rule does not require governments to fund the liability, only to disclose it. But the disclosure will put huge pressure on state and local governments to do something or face the consequences from the credit rating agencies. Samuel Tyler, president of the Boston Municipal Research Bureau, says the state needs a comprehensive approach to the problem, just as it did on underfunded pension systems in the late 1980s.

The real heat will come when politicians and taxpayers see exactly the costs for retiree benefits, and face the tough choices of money for retirees or money for schools or -- gasp! -- raising taxes. The private sector has increasingly been shifting costs to retirees. It's early, but states like Alabama and Ohio are doing the same. Watch this issue: It is a big-ticket item -- and it is going to get contentious.

Here is a NY Times story from 12/11/05, reprinted in its International Herald Tribune. It begins:
Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.

It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.

The total came to about $178 million, or more than double the city's operating budget. And the bill was growing.

"Then we knew we were looking down the barrel of a pretty high-caliber weapon," said Gary Meier, Duluth's human resources manager, who attended the meeting where the actuary presented her findings.

Mayor Herb Bergson was more direct. "We can't pay for it," he said in a recent interview. "The city isn't going to function because it's just going to be in the health care business."

Duluth's doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.

Off the government balance sheets - out of sight and out of mind - those obligations have been ballooning as health care costs have spiraled and as the baby-boom generation has approached retirement. And now the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to do what Duluth has done: to come to grips with the total value of its promises, and to report it to their taxpayers and bondholders.

Posted by Marcia Oddi on January 10, 2006 09:46 AM
Posted to Indiana Government | Legislative Benefits